The HFRX Hedge Fund Index performed well and was up 2.5% in Q1.
Almost all strategies delivered positive returns. Global macro and trend following strategies performed best (+5.9%) followed by long-short equity hedge funds (+3.4%). Merger-arbitrage strategies performed worst (-0.7%).
US private real estate operating fundamentals are mixed in terms of operating fundamentals and transaction prices.
Nationally, US apartment rents grew slightly in March from the prior month and are up 3.6% YOY.
Apartment supply jumped to a 36-year high in 2023 with occupancy rates trending downward to 94% (well below 2021-2022 peaks of 97%-98% but inline with historical averages).
2024 is projected as another record supply year which should further constrain rent growth. However, the supply pipeline is expected to drop dramatically in 2025 and 2026 which could lead to faster annual rent growth going forward.
While occupancy levels and YOY rental growth are at pre-pandemic levels, rents are still 37% higher on an absolute level relative to pre-pandemic levels.
Industrial fundamentals remain strong, but market rent growth is decelerating from peak levels.
In-place rent growth was flat QOQ and increased by 6.0% YOY in Q1 2024. Vacancy rates increased to 5.7% but are still well below the 7.0% historical averages.
Demand for small-bay industrial properties remains high with supply constrained. As such, the opportunity to drive rent growth within the small-bay segment is better than within the more prevalent large-bay segment.
Office fundamentals are clearly under pressure with increasing frequency of defaults on debt.
Cap-rates have risen, given rising interest rates and the sharp increase in debt funding costs.
However, cap-rates appear to be stabilizing with interest rates peaking. This stabilization may lead to increased transaction volume as buyer and seller expectations converge.
Pricing declines accelerated with the NCREIF index down 3.0% in Q4 2023 (latest data available) and 8.0% for full-year 2023. The September quarterly decline represents the fifth straight quarter of declines beginning in Q4 2022.
Sales volumes remain depressed as cap rates have risen and property valuations have declined. The bid / ask spread remains high.
Refinancing risk is an area to closely monitor as substantial commercial real estate debt matures over the next few years.
The office sector and some pockets of retail are clearly under pressure and may see defaults pick up considerably over the next 18 months. Many apartment deals done in frothy periods of 2021 and early 2022 may also experience pressure as short-term loans mature over the next twelve months.
Private equity performed well in 2023 with buyout funds experiencing solidly positive performance despite the large rise in interest rates. However, deal activity remains relatively muted and exits remain depressed thus far in 2024.
According to Cambridge Associates, US PE returned 6.2% YTD through Q3 2023 (latest data available). Anecdotally, PE returns likely improved by another 3% to 4% in Q4 resulting in full-year 2023 gains near 10%.
PE buyout returns in 2023 lagged broader public equity markets as PE held up much better in 2022 and given that most PE buyout exposure is not within the mega-cap technology space (other sectors in the public markets rallied far less in 2023).
In Q1 2024, US PE buyout deal activity remained relatively flat in $ value terms at roughly $140bln. Deal activity has stabilized in the $140bln-$160bln per quarter over the last several quarters.
Platform LBOs continue to be scarce given their high dependence on leverage.
In 2023, valuations for new deals (down 20%-25% from peaks) bottomed following a two-year reset period from peaks seen in 2021. As public market valuations increased throughout 2023, short-term interest rates stabilized, and operating fundamentals at portfolio companies largely remained strong, PE deal valuations have begun to increase again.
In Q1 2024, average deal valuations increased to 11.9x trailing EBITDA (vs. trough of 10.8x) versus 13.8x in 2021.
Debt / EBITDA levels of new deals contracted to 5.1x in Q1 2024 from 5.9x in 2022 with debt / total capital declining to 45% versus 51% in 2022 and versus the 10-year average of 55%.
Exit activity remains depressed. While PE firms expect a steady increase in distributions throughout 2024, material increases in exits are yet to manifest themselves.
Q1 2024 exit activity declined by 17% QOQ vs. Q4 2023 and remains well below pre-pandemic levels. This decline follows a bounce in Q4 2023 exit activity. Over the past several quarters, exit activity seems to have stabilized at low levels.
Improved valuations and potential declines in interest rates may lead to improved exit activity in 2024.
However, if exit activity remains depressed, we expect PE firms to continue to seek liquidity via increased activity in the secondaries market.
Venture capital fund performance has experienced modest declines through Q3 2023 (latest data available).
According to Cambridge Associates, US VC returned -3.9% YTD through Q3 2023 (latest data available).
The unknown at this point is what valuations may be for companies requiring new funding rounds. Many VC portfolio companies took advantage of frothy conditions in 2021 to raise substantial amounts of cash. This cash hoard has provided cash runway through 2024 and maybe into H1 2025.
However, down rounds are increasing in frequency and companies are increasingly implementing investor friendly provisions.
Deal activity in terms of $ value remains at multi-year lows. However, venture capital fundraising has remained strong, and firms are sitting on over $300bln of dry powder.
Public market valuations for VC-backed companies have modestly improved since trough levels seen in mid-2022 but remain well lower than peak levels.
The performance of recent VC-backed IPOs has been lackluster and has trailed broader markets.
As such, VC firms are likely to continue holding better performing companies for longer and waiting until public market valuations for fast-growth companies improve further.
